Lassoing GASB 45

Texas is leading a charge to get rid of the accounting rule that forces states and localities to tally the future costs of health benefits for retirees.

John E. Petersen was GOVERNING's Public Finance columnist. He was a Professor of Public Policy and Finance at the George Mason School of Public Policy.

Texas Comptroller Susan Combs has been getting significant airtime. That's because she's leading a revolt against GASB's new Rule 45 - the one the Government Accounting Standards Board has promulgated that requires state and local governments to calculate the cost of non-pension benefits that employees earn today but don't receive until they retire.

The big item is retiree health benefits. For most governments, the revised accounting rule is a major change in practice, since they have been using the pay-as-you-go method, simply paying the health care bill as it comes due. Tallying up the future costs of the health benefits for current employees (and for those that are already retired) has been generating huge and scary numbers on the debit side of the ledger. States and localities are trying to come up with strategies for dealing with this debt. The Texas comptroller is taking a different route: She is campaigning to have the rule set aside.

Her argument for denying the applicability of GASB 45 is that health care benefits for retirees are not a matter of contract and, implicitly, the program can be scaled back whenever the governments decide to do so. GASB's answer to this is that so long as the health benefit program is offered to retirees, it represents deferred compensation (a benefit the workers accepted instead of higher pay). If Texas changed its retiree health programs, then its liabilities (at least for new workers) would be capped off or would decline.

Texas has reason to worry about the rule. Despite its reputation for small government, there are a lot of state and local workers in Texas. While there evidently is not an official actuarial study, it appears that retirement health benefits are offered to most state and local employees and that the unfunded liability might sum to $50 billion in a few years. That estimate is in accord with studies done in California. There, surveys in school districts found that teachers had unfunded retirement health liabilities of about $50,000 each. Texas, with almost as many teachers who qualify for post-retirement benefits, could see liabilities amounting to $20 billion for its teachers. Since public school teachers make up about half of the state-local work force, a $40 billion to $50 billion figure is likely.

The impact of GASB 45 on government balance sheets needs to be put into perspective. In Texas, all state and local general obligation debt (tax-supported debt) amounts to about $60 billion. Thus the $50 billion in other post-employment benefits - OPEB - is a big item, not to mention several billion more in unfunded pension obligations. Those figures grab the attention of the credit-rating agencies.

More serious, however, are the steps to be taken to mitigate the impact. A few decades ago, when the country was younger and governments were growing, paying a little extra each year to relatively few retirees for health care was no big deal. But now there are many more of them, and the amounts to be paid out under existing programs will spiral unless OPEB plans are funded or benefits reduced - an outcome that is politically chancy and legally perilous.

Accountants and actuaries don't cause debt; they merely measure it and explain how to report it. But as the bearers of bad news, they do get the blame, which is a view that Combs is fanning.

Comptroller Combs has written GASB asking for a meeting "to resolve the problems," and she has rounded up support from Texas legislators who are filing bills that specify that GASB 45 would not apply to Texas. The Lone Star State's chief finance officer is not planning to go it alone: She has copied her GASB letter to the chief accounting officers in the other 49 states to get their support in setting aside the new rule. GASB, which adopted Rule 45 in 2004, is thus far holding firm to its scheduled implementation starting next year for large governments. Meanwhile, since the rule already has stimulated a large assortment of studies and reactions, including those of the rating agencies and various investor groups, the chances of putting this genie quietly back in the bottle are remote at best. More likely, the comptroller is laying the groundwork for some furious politicking and agenda-setting as OPEB's costly crown of thorns is pressed down on unwilling Texas politicians.